Financial Markets: Understanding the Role of Securities, Interest Rates, and Institutions, Exams of Nursing

Download Financial Markets: Understanding the Role of Securities, Interest Rates, and Institutions and more Exams Nursing in PDF only on Docsity! Financial Markets Exam #1 Questions and answers Financial Market - - CORRECT ANSWERS✅ A market in which financial assets (securities) such as stocks and bonds can be purchased or sold. Funds are transferred in financial markets when one party purchases financial assets previously held by another party. Role of Financial Markets - - CORRECT ANSWERS✅ Transfer funds from those who have excess funds to those who need funds. Accommodating Corporate Finance Needs: The financial markets serve as the mechanism whereby corporations (acting as deficit units) can obtain funds from investors (acting as surplus units) Accommodating Investment Needs: Financial institutions serve as intermediaries to connect the investment management activity with the corporate finance activity. Surplus Units - - CORRECT ANSWERS✅ Participants who receive more money than they spend, such as investors Deficit Units - - CORRECT ANSWERS✅ Participants who spend more money than they receive, such as borrowers Financial Markets Exam #1 Questions and answers Securities - - CORRECT ANSWERS✅ Represent a claim on the issuers Debt Securities - - CORRECT ANSWERS✅ Debt incurred by the issuer (also called credit, or borrowed funds) Equity Securities - - CORRECT ANSWERS✅ Represent equity or ownership in the firm (also called stock) Primary vs Secondary Markets - - CORRECT ANSWERS✅ Primary markets facilitate the issuance of new securities. Secondary markets facilitate the trading of existing securities, which allows for a change in the ownership of the securities Liquidity - - CORRECT ANSWERS✅ Degree to which securities can easily be sold without loss of value. Securities can be classified as...? - - CORRECT ANSWERS✅ Money market securities, capital market securities, or derivative securities. Financial Markets Exam #1 Questions and answers Sarabanes-Oxley Act - - CORRECT ANSWERS✅ Required that firms provide more complete and accurate financial information Foreign Exchange Market - - CORRECT ANSWERS✅ International financial transactions normally require the exchange of currencies. The foreign exchange market facilitates this exchange. Role of Depository Institutions - - CORRECT ANSWERS✅ Accept deposits from surplus units and provide credit to deficit units through loans and purchases of securities. Role of Non-Depository Institutions - - CORRECT ANSWERS✅ Finance companies, mutual funds, securities firms, insurance companies, pension funds. Finance Companies - - CORRECT ANSWERS✅ Obtain funds by issuing securities and lead the funds to individuals and small businesses Mutual Funds - - CORRECT ANSWERS✅ Sell shares to surplus units and use the funds received to purchase a portfolio of securities Financial Markets Exam #1 Questions and answers Securities Firms - - CORRECT ANSWERS✅ Provide a wide variety of functions in financial markets (broker, underwriter, dealer, advisory) Insurance Companies - - CORRECT ANSWERS✅ Provide policies that reduce the financial burdens associated with death, illness, and damage to property. Charge premiums and invest in financial markets. Pension Funds - - CORRECT ANSWERS✅ Manage funds until they are withdrawn for retirement. Institutional Role as a Monitor of Publicly Traded Firms - - CORRECT ANSWERS✅ Financial institutions facilitate the flow of funds form individual surplus units (investor) to deficit units. Financial institutions also serve as monitors of publicly traded firms. How the Internet Facilitates Roles of Financial Institutions - - CORRECT ANSWERS✅ It has enabled financial institutions tot perform their roles more efficiently. Allows for lower costs and fees. Makes form more competitive forcing other firms to price their services competitively. Financial Markets Exam #1 Questions and answers Loanable Funds Theory - - CORRECT ANSWERS✅ Suggests that the market interest rate is determined by the factors that control supply of and demand for. Large Supplier of Loanable Funds - - CORRECT ANSWERS✅ Household demand for loanable funds. Governments Demand for Loanable Funds - - CORRECT ANSWERS✅ When planned expenditures are not covered by incoming revenues. What demand is said to be interest inelastic? - - CORRECT ANSWERS✅ Government demand. Insensitive to interest rates. Expenditures and tax policies are independent of the level of interest rates. What can the Loanable Funds Theory be used to explain? - - CORRECT ANSWERS✅ Movements in the general level of interest rates in a particular country. Why interest relates among debt securities of a given country vary. Why do households demand for loanable funds? - - CORRECT ANSWERS✅ To finance housing expenditures as well as the purchase of automobiles and household items. Inverse relationship between the interest rate and the quantity of Loanable funds demanded. Financial Markets Exam #1 Questions and answers Impact of foreign flows of funds on interest rates - - CORRECT ANSWERS✅ Interest rate for a certain currency is determined by the demand for funds in that currency and the supply of funds available in that currency. Economic conditions - - CORRECT ANSWERS✅ The primary forces behind a change in the supply of savings provided by households or a Change in the demand for funds by households, business, or the government. Net Demand - - CORRECT ANSWERS✅ ND = Da - Sa Yields on debt securities are affected - - CORRECT ANSWERS✅ Credit (default) risk, liquidity, tax status, term to maturity Credit (default) risk - - CORRECT ANSWERS✅ Investors must consider the creditworthiness of the security issuer. All else being equal, securities with a higher degree of default risk must offer higher yields. Especially relevant for longer term securities. In general, securities with a higher or lower degree of default risk offer higher yields? - - CORRECT ANSWERS✅ Higher Financial Markets Exam #1 Questions and answers Rating agencies - - CORRECT ANSWERS✅ Charge the issuer of debt securities a fee for assessing default risk Accuracy of credit ratings - - CORRECT ANSWERS✅ rating issued by the agencies are useful indicators of default risk by they are opinions not guarantees. Oversight of credit rating agencies - - CORRECT ANSWERS✅ The financial reform act of 2010 established an office of credit ratings within the securities and exchange commission in order to regulate credit rating agencies. Rating Agencies must establish internal controls. The lower a security's liquidity the higher or lower the yield preferred by an investor - - CORRECT ANSWERS✅ Higher Debt securities with a short-term maturity or an active secondary market have what - - CORRECT ANSWERS✅ Greater Liquidity Tax Status - - CORRECT ANSWERS✅ Investors are more concerned with after-tax income. Taxable securities must offer a higher before-tax yield Financial Markets Exam #1 Questions and answers Maturity dates will differ between - - CORRECT ANSWERS✅ Debt securities The term structure of interest rates defines the - - CORRECT ANSWERS✅ Relationship between term to maturity and the annualized yield Yield curve - - CORRECT ANSWERS✅ Exact same as what we have seen for awhile...Deflation is scary. US Dollar is world reserve Are small yield differentials can be relevant or irrelevant - - CORRECT ANSWERS✅ Relevant The yield differential is - - CORRECT ANSWERS✅ The difference between the yield offered on a security and the yield on the risk-free rate Yields can be measured in - - CORRECT ANSWERS✅ Basis Points One basis points equal - - CORRECT ANSWERS✅ 0.01% Financial Markets Exam #1 Questions and answers Implications: preferred habitat theory - - CORRECT ANSWERS✅ Although investors and borrowers may normally concentrate on a particular maturity market, certain events may cause them to wander from their "natural" or preferred market. Research on term structure theories - - CORRECT ANSWERS✅ Although the results differ there is evidence that expectations, liquidity premium, and segmented markets theories all have some validity If we assume that investors and borrowers currently expect interest rates to rise, most borrowers need long-term funds, while Mose investors have only short-term funds to invest, and investors prefer more liquidity to less... - - CORRECT ANSWERS✅ Then all three conditions place upward pressure on long-term yields relative to short term yields leading to upward sloping yield curve Forecasting Recessions - - CORRECT ANSWERS✅ Some analysts believe that flat or inverted yield curves indicate a recession in the near future Making investment decisions - - CORRECT ANSWERS✅ IF the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on on get- term securities even though they have funds to invest for only a short period of time Financial Markets Exam #1 Questions and answers Making decisions about financing - - CORRECT ANSWERS✅ Firms can estimate the rates to be paid on bonds with different maturities. This may enable them tot determine the maturity of the bonds they issue. Why does the slope of the yield curve change? - - CORRECT ANSWERS✅ Conditions may cause short-term yields to change in a manner that differs from the change in long-term yields. How the yield curve has changed over time - - CORRECT ANSWERS✅ Graph 3-30 International structure of interest rates - - CORRECT ANSWERS✅ The yield curve's shape at any given time also varies among countries